CLA-2 CO:R:C:S 558730 BLS
District Director of Customs
9400 Viscount Street
El Paso, Texas 79925
RE: Application for Further Review of Protest No. 2402-
941-00019; Eligibility of bingo game cards for
duty-free treatment under the GSP; Internal Advice
42/93; substantial transformation
Dear Sir:
This is in reference to an Application for Further Review of
Protest No. 2402-941-00019, filed by counsel on behalf of Arrow
International, Inc. ("Arrow"), concerning the eligibility of bingo
game booklets produced in Mexico for duty-free treatment under the
Generalized System of Preferences (GSP). We note that in
Headquarters Ruling Letter (HRL) 557408 dated January 14, 1994, we
addressed the same issue, raised by Arrow in the context of an
internal advice request (I.A. 42/93).
FACTS:
Background
The protestant advises that each charitable bingo game
establishes its own program or sequence of bingo games to be played
at a bingo session. For control purposes, a specific color of a
bingo sheet will be used for each game. The sequence of colors and
the cut (number of bingo faces) is referred to as a booklet or pad
of bingo sheets. According to protestant, the large, printed
master sheets of bingo paper imported into Mexico do not become a
saleable, retail item until they are processed into a final booklet
configuration. Arrow currently produces over 13,000 different
types of bingo books annually.
Production
Step 1: Sequentially ordered master sheets of U.S-origin
with bingo faces are pulled from inventory for
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each customer order in the required, customer
specific color rotation and permutation.
Step 2: Each color of the customer specific master sheets
is manually randomized by changing the order of the
customer specific master sheets, resulting in
customer specific randomized master sheets (RMS).
The randomization process must ensure that
duplicate faces will not be in play
simultaneously and that each end-user will have
unique faces.
Step 3: RMS are placed in a specially designed cabinet for
collation.
Step 4: The RMS are collated by manually pulling RMS, one
sheet at a time in the color rotation demanded by
the customer order and inserting a printed wax
backing sheet after each color rotation cycle.
This results in customer specific collated
master sheets (CMS).
Step 5: CMS are jogged to properly align the edges of
the CMS. (Arrow states that after Step 5,the
resulting product can be sold to jobbers and in
fact similar products produced in the U.S. will
actually be sold in the future to Cowells-Arrow
Bingo U.K. in England.)
Step 6: CMS are placed on skids for transfer to a cutting
machine.
Step 7: CMS undergo an initial cut. The cutting changes the
CMS from a 36 face configuration into an 18 face
configuration. The resulting product is referred
to as cut collated master sheets (CCMS).
Step 8: The CCMS are glued along a single edge on a
specially designed gluing rack.
Step 9: The glued CCMS are hand sliced from the gluing
rack.
Step 10: The glued CCMS are fanned and inspected, forming
booklets which have the specified number of pages
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plus a single backing sheet and the specified color
rotation and series demanded by the customer order.
At this stage, the product is referred to as
customer specific collated UPS booklets (CUB).
After Step 10, the booklets can be sold (and are
sold) to job shops that will complete the remaining
cutting stages as demanded by their customers in
order to provide them with a product in the
specified size.
Step 11: Booklets are cut to the size demanded by
the specific customer order.
Step 12: Booklets are manually separated and inspected.
Step 13: Booklets are grouped into bundles and inspected.
Step 14: Booklets are transferred to the packing area.
ISSUE:
Whether the bingo game booklets from Mexico are entitled to
duty-free treatment under the GSP.
LAW AND ANALYSIS:
Under the GSP, eligible articles the growth, product or
manufacture of a designated beneficiary developing country (BDC)
which are imported directly into the Customs territory of the U.S.
from a BDC may receive duty-free treatment if the sum of (1) the
cost or value of materials produced in the BDC, plus (2) the direct
cost of the processing operations in the BDC, is equivalent to at
least 35 percent of the appraised value of the article at the time
of entry, See 19 U.S.C. 2463(b).
During the period in question, Mexico was a designated BDC.
See General Note 3(c)(ii)(A), predecessor of General Note 4,
Harmonized Tariff Schedule of the United States (HTSUS). In
addition, it appears from a description of the merchandise that the
articles in question are classified under subheading 9504.90.60,
HTSUS, "Articles for arcade, table or parlor games... Other", a GSP
eligible provision.
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If, as in this case, the article is made at least in part of
materials imported into the BDC, the article will be considered to
be a "product of" the BDC only if those materials are substantially
transformed into a new and different article of commerce. The
cost or value of materials which are imported into the BDC to be
used in the production of the article, as here, may be included in
the 35% value-content computation only if the imported materials
undergo a double substantial transformation in the BDC. That is,
the non-Mexican components must be substantially transformed in
Mexico into new and different intermediate articles of commerce,
which are then used in Mexico in the production of the imported
article. See, section 10.177(a), Customs Regulations (19 CFR
10.177(a)); and Azteca Milling Co. v. United States, 703 F.
Supp. 949 (CIT 1988), aff'd, 890 F.2d 1150 (Fed. Cir. 1989).
"[A] substantial transformation occurs when an article emerges
from a manufacturing process with a name, character, or use which
differs from those of the original material subjected to the
process." Torrington Co. v. United States, 764 F.2d 1563, 1568, 3
CAFC 158, 163 (Fed. Cir. 1985).
The question we must first address is whether the imported
master sheets are substantially transformed abroad into a "product
of" Mexico.
Arrow argues that substantial transformations occur and
intermediate articles of commerce are produced after completion of
Steps 5 and 10. In support thereof, Arrow states that after Step
5, the collated master sheets will actually be sold in that form as
a producer good; and the collated UPS booklets created after Step
10 may be sold to job shops. Arrow contends that the final product
is a consumer good, different from both the product at Step 5 and
the product after Step 10. Arrow also points out that the direct
processing costs in Mexico are in excess of 60% of the value of the
merchandise, and that this should be a factor in determining
whether a substantial transformation occurred. The importer cites
Headquarters Ruling Letter (HRL) 555265, dated July 3, 1989,
Torrington, supra, and National Juice Products Association v.
United States, 628 F. Supp. 978, (CIT 1986), to support its
contention that at least two substantial transformations result
from the processing in Mexico.
It is well-established that a "complex and meaningful"
assembly operation can result in the emergence of a new and
different article of commerce with a name, character and use
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different from the components of which it was made. See, Texas
Instruments v. United States, 681 F.2d 778, 69 CCPA 151 (1982), and
C.S.D. 85-25, 19 Cust. Bull. 544 (1985). However, such operations
must result in the emergence of an article which differs in
character and use from the component parts of which it is composed.
See, HRL 557316, dated November 4, 1993.
In National Hand Tool v. United States, Slip Op. 92-61 (April
27, 1992) aff'd, 989 F.2d 1201 (Fed. Cir. 1993), a country of
origin marking case, the Court of International Trade held that
imported hand tool components which were used to produce flex
sockets, speeder handles and flex handles were not substantially
transformed when further processed and assembled in the U.S. The
components were cold-formed or hot-forged into their final shape
prior to importation, except for speeder handle bars, which were
reshaped by a power press after importation. The grip of the flex
handles were also knurled in the U.S., by turning the grip portion
of the handle against a set of machine dies that formed a cross-hatched diamond pattern. The articles were heat treated, cleaned,
electroplated, and marked with a trademark and size. The imported
parts were then assembled with other parts, which required some
skill and dexterity on the part of the workers.
The court stated that the determination of a substantial
transformation must be based on the totality of the evidence, and
applied a 3-pronged test utilizing name, character, and use, in
determining whether a substantial transformation had occurred.
The court found that the components were unchanged as to form after
processing in the U.S., that the use of the imported articles was
predetermined at the time of importation, and that the name of the
components also remained the same after entry into the U.S. The
court discounted plaintiff's argument that a substantial
transformation should be found based on the value of the processing
performed in the U.S., which plaintiff described as significant,
but decided the issue based solely on name, character and use.
(See also Uniroyal, Inc. v. United States, 3 C.I.T. 220, 542
F.Supp. 1026 (1982), also a country of origin marking case, where
the court found that the attachment of an outsole to a shoe upper
was a minor manufacturing or combining process which left the
identity of the shoe upper intact, and that the completed upper was
the very essence of the finished shoe.)
The concept of the "very essence" of a product was applied in
National Juice Products, where the court determined that imported
frozen concentrated orange juice was not substantially transformed
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in the U.S. when it was domestically processed into retail orange
juice products. The court agreed with Customs that the orange
juice concentrate "imparts the essential character to the juice and
makes it orange juice... thus, as in Uniroyal, the imported product
is the very essence of the retail product." (See also HRL
555982/556704, where we found that the blending of non-Belizan
orange juice to produce frozen concentrated orange juice was not a
substantial transformation.)
Applying the principles of National Hand Tool, Uniroyal, and
National Juice Products to the instant case, we find that through
the various assembly operations performed in Mexico, i.e., cutting,
collating, and gluing, the exported master sheets retain their
essential character--that of bingo face sheets. The sheets are
dedicated for use as bingo face sheets when printed in the U.S.,
and this use remains unchanged through completion of the bingo
booklets. Whether in its exported condition, commercially
identified as master sheets, or in its imported condition known as
bingo booklets, and through the intermediate assembly processes,
the material is essentially the same product at different stages of
manufacture. We do not find that National Juice Products, nor the
other cited authorities, lend support to Arrow's position regarding
a double substantial transformation of this product.
In HRL 555365, we found that cutting rolls of aluminum strip
into lengths and crowning the cut strips resulted in a new and
different article of commerce which had limited uses, e.g.,
venetian blind slats, surveyor stakes, and lattice fences. Prior
to these operations, the aluminum strip was a raw material which
possessed nothing in its character which indicated any of these
uses. The second substantial transformation occurred through
various operations including the assembly of the slats with other
components resulting in venetian blinds. In the instant case, the
exported master sheet is not a raw, multi-functional material, as
the rolls of aluminum strip in HRL 555365, but rather is a product
dedicated to use as bingo faces throughout the processing in
Mexico.
In Torrington, the court found that wire with a multitude of
possible uses underwent a double substantial transformation in
becoming sewing machine needles. The initial substantial
transformation occurred when processing of the wire resulted in
swaged needle blanks. We have limited Torrington to the specific
factual situation found therein (See, T.D. 86-7, 20 Cust. Bull.
(1986)), and therefore do not recognize Torrington as precedent for
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the factual situation in the subject case. Even if we were to
consider that case, we find no basis for support of the importer's
position, since in Torrington the identity of the final product
was clearly distinct from the wire from which it was made, while in
the subject case the master sheet retains its identity as bingo
faces throughout the foreign processing. Further, the fact that
at various stages of production prior to completion of the imported
products the materials may be sold or offered for sale is not
dispositive of the issue as to whether a substantial transformation
has occurred.
Accordingly, we find that the operations in Mexico do not
result in a substantial transformation of the master sheets, for
purposes of determining whether the imported articles are eligible
for duty-free treatment under the GSP.
HOLDING:
U.S.-origin master sheets with bingo game faces do not undergo
a substantial transformation as the result of operations performed
in Mexico. Therefore, the imported bingo game booklets are not
considered "products of" Mexico for purposes of the GSP. The
protest should be denied in full.
In accordance with Section 3A (11)(b) of Customs Directive 099
3550-065, dated August 4, 1993, Subject: Revised Protest Directive,
this decision should be mailed by your office to the protestant no
later than 60 days from the date of this letter. Any reliquidation
of the entry in accordance with the decision must be accomplished
prior to mailing of the decision. Sixty days from the date of the
decision the Office of Regulations and Rulings will take steps to
make the decision available to Customs personnel via the Customs
Module in ACS and the public via the Diskette Subscription Service,
Lexis, Freedom of Information Act and other public access channels.
Sincerely,
John Durant, Director
Commerial Rulings Division